On the Design of the Appeals Process: The Optimal Use of Discretionary Review versus Direct Appeal

Transcription

1 On the Design of the Appeals Process: The Optimal Use of Discretionary Review versus Direct Appeal Steven Shavell ABSTRACT The socially desirable design of the appeals process is analyzed assuming that it may involve either an initial discretionary review proceeding under which the appeals court would decide whether to hear an appeal or else a direct appeal. Using a stylized model, I explain that the appeals process should not be employed when the appellant s initial likelihood of success falls below a threshold, that discretionary review should be used when the likelihood of success lies in a midrange, and that direct appeal should be sought when this likelihood is higher. Further, I emphasize that appellants should often be able to choose between discretionary review and direct appeal, notably because appellants may elect discretionary review to save themselves (and thus the judicial system) expense. This suggests the desirability of a major reform of our appeals process: appellants should be granted the right of discretionary review along with the right that they now possess of direct appeal at the first level of appeals. 1. INTRODUCTION The object of this article is to analyze the socially desirable design of the appeals process. I assume that in principle this process may involve either an initial discretionary review proceeding under which the appeals court would decide whether to hear an appeal or else a direct appeal. I show in a stylized model that under broad circumstances it STEVEN SHAVELL is the Samuel R. Rosenthal Professor of Law and Economics at Harvard Law School. I thank Michael Boudin, Andrew Daughety, Louis Kaplow, Daniel Meltzer, Geoffrey Miller, Proshanto Mukherji, Richard Posner, David Rosenberg, and David Shapiro for comments, Gregory Dickinson, Joshua Gottlieb, Joanna Nairn, Holger Spamann, and Sherri Wolson for research assistance, and the John M. Olin Center for Law, Economics, and Business at Harvard Law School for research support. [Journal of Legal Studies, vol. 39 (January 2010)] 2010 by The University of Chicago. All rights reserved /2010/ $

2 64 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 would be socially best for appellants to enjoy the right to choose between discretionary review and direct appeal. Then appellants would often elect discretionary review in order to spare themselves the expense of an appeal if their cases are determined to be unpromising. Two social benefits would result: many cases now appealed would be more cheaply and fittingly resolved, for they would end following a negative outcome under discretionary review, and many cases not now appealed would be appropriately appealed, for they would result in discretionary review and would be appealed following a positive outcome. This often theoretically advantageous design of the appeals process allowing appellant choice differs from reality. As I observe, discretionary review and direct appeal never coexist as options for appellants. That suggests the possible desirability of a major reform of our appeals process: at the first level of appeals, let appellants be granted the right of discretionary review along with the right that they now generally possess of direct appeal. However, because of differences between the private and social value of appeals, the theory I develop does not indicate that at the level of the supreme courts appellants should be given the right of direct appeal where, as at the U.S. Supreme Court, they now have only the right of discretionary review. In Section 2 of the article, I present the basic analysis of the optimal design of the appeals system employing a stylized model in which social welfare depends positively on the correction of mistaken trial court decisions and negatively on the costs of appeals. I explain that if a litigant s initial probability of reversal on appeal is below a certain threshold, the litigant s case will not be socially worthwhile considering under the appeals process because the probability-discounted or expected benefit from reversal would be less than the cost. But if the probability of reversal exceeds the threshold, the case will be worthwhile considering on appeal. In particular, if the probability of reversal is between the threshold and a second higher threshold, the case should be submitted for discretionary review rather than direct appeal. An essential reason is that under discretionary review, society saves the costs of a full appeal when the prospects of the case do not turn out to be sufficiently good to warrant that process. If, however, the appellant s initial probability of reversal exceeds the second threshold, the case should be directly appealed. The primary explanation is that it is likely that discretionary review would result in the granting of a full appeal, which means that the expense of discretionary review will have been needlessly incurred The magnitudes of the two probability thresholds are determined in the model; they

3 DESIGN OF THE APPEALS PROCESS / 65 Because the socially desirable manner of resolving cases depends on the appellant s initial probability of success, it must be the appellant who decides whether to make use of the appeals process and, if so, whether to employ discretionary review or direct appeal. In other words, it is necessary to harness the information that the appellant naturally possesses about the probability of success for the appeals process to be optimally employed. 2 (The appeals court itself will have no information about the prospects of a case unless it engages at least in discretionary review, yet whether it should undertake this review is one of the questions at issue.) The foregoing describes socially best behavior in the model, but the question arises, what behavior will be in the self-interest of appellants and of appeals courts? The self-interest of appellants will at least resemble society s interest, and their evaluation of discretionary review versus appeal will thus have the basic character of that which is socially best. In particular, under discretionary review, appellants will save their costs of a full appeal when the prospects of their cases do not turn out to be good. Hence, appellants may well prefer discretionary review to appeal when their initial prospects are uncertain. And appellants will wish to bypass discretionary review and to appeal directly when their initial prospects are sufficiently promising, for then their expected savings from discretionary review would be lower than the cost of such review. Although appellants self-interested use of the appeals process will be qualitatively similar to the socially desirable use of that mechanism, it will not be the same, for two reasons. First, appellants do not bear the full social costs of appeal they do not pay the opposing appellees costs or the costs of the judicial system. This difference in the incurring of costs generates a tendency to use the appeals process too often. Second, appellants may not benefit from the outcome of an appeal in the way society would (for example, if a reversal makes new law, that might not be of significance to the appellant). Potential difficulties involving a difference between the motives of appeals courts and of society may also exist. It is possible, for example, depend on the costs of discretionary review, the costs of appeal, and the social value of reversals. 2. This point may be viewed as a generalization of the raison d être for the appeals process itself. The functional rationale for the appeals process is that disappointed litigants would be expected to have information about the possible occurrence of legal error, so giving these litigants the right to initiate appeals allows society to exploit their information it focuses higher court reconsideration on cases in which legal error was most likely to have occurred. See Shavell (1995) for a development of this rationale.

4 66 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 that appeals courts do not weigh the resource costs of adjudication in the manner that society would prefer. After considering these problems of motives that deviate from society s, I discuss policies that could be employed to ameliorate them, notably, the imposition of fees for use of the appeals process and the use of payments based on the outcome of appeals. I then examine a number of extensions to the model, including the following: the possibility that expenditures on discretionary review would reduce the costs of a subsequent appeal because the tasks undertaken in a discretionary review would otherwise have been performed in an appeal, the ability of appellants to alter the character of their legal effort on the basis of the outcome of discretionary review, and the possibility that a request for discretionary review would signal to the court that the appellant was uncertain about success. In Section 3, I summarize the character of the appeals process in reality. As I indicated above, appellants do not now possess the right to choose between discretionary review and appeal I find that in all legal systems, whether state sanctioned or private, appellants either have the right of appeal 3 or of discretionary review, but never both. In commonlaw countries, they typically enjoy the right of appeal at the initial level of appeal, whereas they often must submit to discretionary review at supreme courts. In civil law countries, they usually hold the right of appeal even at supreme courts. I also observe that the volume of appeals is high, absorbing substantial legal resources, and that the majority of appeals fail where appeal is as of right. In light of this description of the appeals process, I turn, in Section 4, to the interpretation of the theoretical analysis. A question that I emphasize is whether a new policy of adding the opportunity of discretionary review to the right of appeal at the first level of appeals would be socially beneficial. I suggest that the answer may be yes. Presently, the annual volume of appeals in the United States is in the hundreds of thousands, and about three-quarters of these appeals fail. I conjecture that much of this waste of appellant and judicial effort could be obviated under the new policy because many of the appellants now bringing appeals would be likely to opt for discretionary review, which might involve significantly less expense (even though full appeal now often involves methods of screening cases that may lower judicial burdens). 3. By the right of appeal, I refer generally to the right of appeal of a final judicial determination in a case, not necessarily of a prior, interlocutory, decision.

5 DESIGN OF THE APPEALS PROCESS / 67 It is also true that many disappointed trial court litigants who today find appeal too costly to bring would be led to ask for discretionary review because this would be less expensive, and that could be socially beneficial. The attraction of allowing appellants at the first level of appeals courts the option of discretionary review may also hold for appeals at supreme courts in civil law countries, where appeal is as of right, and at certain state supreme courts in the United States, where the same is true. I also consider whether, at the level of supreme courts in the United States, where appeal is subject to discretionary review, according appellants the right of direct appeal in addition would be likely to be socially desirable. I explain that such a change would probably be undesirable. Among the reasons I mention are that the benefit from this step would be mainly to save the expense of discretionary review when an appeal is likely to succeed but that this savings would be small; I also discuss the difference between the private and social valuations of the outcomes of appeal as a reason for required discretionary review (for instance, that harmonizing conflicting lower court decisions may have a social value but not a private value). I comment as well on the feasibility of using fees for appeals and otherwise altering the incentives of parties, policies that I explain in the theoretical analysis are in principle desirable. I conclude that there are substantial impediments to the use of such policies, some having to do with limitations of the information of legal authorities and others of a different nature. Before proceeding, let me note that I build in this article on wellappreciated ideas about the value of information 4 and, more particularly, on insightful informal observations from prior writing on appeals, especially that comparing or proposing discretionary review as an alternative to direct appeal, for example, Baker (1994a), Dalton (1985), Lay 4. That information relevant to a subsequent decision and thus information provided by discretionary review has value and ought to be obtained if its value exceeds its cost is a standard point of decision theory; see, for example, the classic reference (Raiffa 1968, pp ). Two specific issues about the value of information from discretionary review are developed here. The first is that the value of information from discretionary review, and thus its optimality, depends on an important factor that varies with the case, namely, the appellant s initial probability of reversal, and I characterize how so. The second is that the cost and value of the information to the appellant is different from its social cost and social value, and I examine the implications of this problem as well as policies that can ameliorate it.

6 68 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 (1981), and Justice William Rehnquist. 5 I also make use of empirical findings about the appeals process, on which see especially research by Theodore Eisenberg and coauthors (Eisenberg 2004; Eisenberg and Heise 2008; and Eisenberg and Miller 2008) and certain governmental sources. 6 The chief contribution of the present article is that, to my knowledge, it is the first to examine the optimal use of discretionary review and direct appeal in a general model of the appeals process and to state that it may be advantageous to give litigants the right to choose between discretionary review and direct appeal BASIC THEORY I set out here a stylized model of the appeals process in order to clarify the analysis of its design and functioning. 8 I assume that there is a trial court and an appeals court. The appeals court can reconsider trial court decisions and has higher authority than the trial court. After a trial court decision, three outcomes are in principle possible: the case decided by the trial court ends with no involvement of the appeals court; the case is heard by the appeals court in an appeals proceeding, which results either in an affirmance or a reversal of the trial court decision; or the case is given preliminary consideration by the appeals court in a discretionary review 5. Justice Rehnquist suggested replacing appeal as of right with discretionary review in the federal district courts in an address at the University of Florida College of Law; see Greenhouse (1984). See also Baker (1994b, pp ), Carlton (1997, pp. 4 5), Federal Courts Study Committee (1990, p. 124), Judicial Conference of the United States (1995, ch. 10), Lay (1989, pp ), Nagel (1994), and Parker and Chapman (1997). 6. The Statistics Division of the Administrative Office of the U.S. Courts collects and publishes statistics on the federal courts; see Administrative Office of the U.S. Courts, Statistical Reports ( For state courts, see National Center for State Courts, Court Statistics Project ( For statistics on the judicial systems of key civil law countries, see Ministère de la Justice (2007), Consejo General del Poder Judicial (2008), and Statistisches Bundesamt (2008a, 2008b). 7. A number of articles contain economic or political-science-oriented theoretical analyses of either direct appeal or discretionary review (some focusing on error correction, others on different issues), but they do not compare direct appeal and discretionary review. See Cameron and Kornhauser (2005, 2006), Daughety and Reinganum (2000), Kornhauser (1995), Levy (2005), and Shavell (1995, 2006), which deal mainly with direct appeal, and Daughety and Reinganum (2006), Lax (2003), Cameron, Segal, and Songer (2000), and Spitzer and Talley (2000), which address mainly discretionary review. 8. A formal version of the model is presented in the Appendix. A more complete version of this Appendix is presented in Section 3 of Shavell (2009).

7 DESIGN OF THE APPEALS PROCESS / 69 Figure 1. Stylized model of the appeals process proceeding, which results in a decision either to end the case or to conduct an appeals proceeding. 9 This is portrayed in Figure 1. I assume also that there is a trial court litigant who is disappointed with the trial court outcome and wishes it to be reversed. I call this party the appellant 10 and the opposing party the appellee. The appellant (together with counsel) formulates a probability that the trial court decision would be reversed in an appeal. If there is a discretionary review, the appeals court determines a refined probability of reversal, that is, a probability that is superior to the initial probability of the appellant. The motivation for the assumption that this probability is superior is that the appeals court is not only an expert body but is also predicting its own behavior. 11 An appeals proceeding involves costs comprising the legal and other 9. In particular, if the appeals court decides to end the case, my assumption is that the case is truly over the appellant cannot treat the adverse outcome of discretionary review merely as advisory and proceed to make a direct appeal. 10. I use this term for simplicity, even though potential appellant would sometimes be apt, for the disappointed litigant might decide not to appeal. 11. I relax this assumption in Section 2.4, where I discuss the possibility that the appeals court might not obtain superior information when it undertakes a discretionary review.

8 70 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 expenses (time and effort) of the appellant, similar expenses of the appellee, and the expenses of the appeals court itself. I refer to these costs collectively as the social costs of an appeal. Likewise, a discretionary review involves social costs, and I assume that they are less than the social costs of an appeal. In addition, I suppose that a reversal generates a social benefit, the motivation being that reversals tend to correct errors, induce better trial court decisions, develop new law, and so on. I also assume that affirmances do not generate social benefits, as they do not change trial court decisions. 12 Finally, I adopt a simple measure of social welfare: the expected social benefits from reversals minus the social costs of the appeals process, including those of discretionary review. This measure of social welfare captures the notion that reversals tend to be socially good and that the costs of the appeals process represent a social detriment The Socially Ideal Appeals Process Now let me describe the socially optimal appeals process, assuming that the parties behave so as to maximize social welfare (their self-interested behavior is addressed in Section 2.2). Specifically, I claim that socially best behavior has the following general description: if the appellant s probability of reversal is less than a first threshold probability, the appellant s case should end without use of discretionary review or appeal; if the probability of reversal exceeds the first threshold but is less than a second threshold, the case should be heard in a discretionary review; and if the probability of reversal exceeds the second threshold, the case should be directly considered in an appeal. 14 Because socially best behavior depends on the appellant s probability assessment, it is the appellant who must decide on the course of action. 12. I discuss the effect of the assumption that affirmances may have social value in Section Let me note that I examined essentially the same measure of social welfare in Shavell (1995). Because I did not consider discretionary review in that article, there was no opportunity to improve social welfare by winnowing out cases unlikely to be reversed. I note as well that the model studied there is consistent with the one studied here, for in the previous article the probability of reversal of a mistaken trial court decision was generally presumed to be less than one, which means that there was a potential role for discretionary review to improve information about the outcome of an appeal. 14. This characterization of the socially best use of appeals and discretionary review presumes that their costs are low enough to make each sometimes worth employing; for details, see the Appendix.

9 DESIGN OF THE APPEALS PROCESS / 71 Let me illustrate this claim with a numerical example involving the following assumptions. The social costs of an appeal are $100,000, the social costs of a discretionary review are $20,000, the social value of a reversal is $250,000, and the appellant s initial prospect of success, that is, of reversal, varies depending on the case. Further, if there is a discretionary review, the appeals court will either determine that the chances of reversal are low which I call bad news or that the chances of reversal are high which I call good news. In particular, let us say that bad news means that the likelihood of reversal is only 10 percent and good news means that the likelihood of reversal is 90 percent. It is important to observe that the initial prospect of reversal must be consistent with the likelihood of bad news and of good news in discretionary review, that is to say, must equal their expected value. For instance, if the initial likelihood of success is 15 percent, consistency requires that the probability-weighted average of bad news and of good news equals 15 percent. This will be true if the probability of bad news is percent and that of good news is 6.25 percent, for then the expected probability will be percent # 10 percen t 6.25 percent# 90 percent p 15 percent. Similarly, if the initial probability of success is 25 percent, then the probability of bad news must be percent and that of good news percent, for percent # 10 percent percent # 90 percent p 25 percent. 15 Now let me explain why, if the appellant s initial probability of success is in a low region, it is best for the case to end. Consider an initial probability of 15 percent. Clearly, direct appeal is not worthwhile, for the expected social benefit from appeal would be 15 percent # $250,000 p $37,500, whereas the cost would be $100, Is discretionary review worthwhile when the appellant s prospect of 15. The point being made is that the probability equals the mean of the probabilities conditional on what the appeals court learns. Algebraically, let q be the appellant s initial probability of reversal and p be the probability of bad news. We must then have q p.1p.9(1 p), since.1 is the probability of reversal given bad news and.9 is the probability of reversal given good news. This formula can be solved for p as a function of q: p p (.9 q)/.8. Note that the formula can hold only for q in [.1,.9]. For values of q below.1 or above.9, there must be different probabilities conditional on bad news and good news. This matter need not detain us for purposes of the illustrations I make in the text. In the Appendix, there is a specification of probabilities of reversal after discretionary review given any q. 16. This conclusion that direct appeal is socially undesirable obviously depends on the social value of a reversal. For instance, if the value of a reversal is $1,000,000, then the expected benefit from appeal would be $150,000, and direct appeal would be socially desirable.

10 72 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 success is 15 percent? To answer this question, we must consider what would occur under the two possible outcomes of discretionary review, bad news and good news. If discretionary review would result in bad news, then it would not be worthwhile holding an appeal, for an appeal with a 10 percent chance of success has an expected value of 10 percent # $250,000 p $25,000, which is less than its cost of $100, If discretionary review would result in good news, however, it would be worthwhile holding an appeal, for an appeal with a 90 percent chance of success has an expected value of 90 percent # $250,000 p $225,000, which exceeds its cost of $100,000 and thus involves a net gain of $125,000. Now we can address the question whether discretionary review is worthwhile when the appellant s initial prospect of success is 15 percent. That means, recall, that the probability of bad news is percent and the probability of good news is 6.25 percent. This in turn means that the expected payoff from discretionary review is 6.25 percen t # $125,000, or $7, This is less than the $20,000 cost of discretionary review, so discretionary review would not be worthwhile. In essence, the low initial probability of success implies a low likelihood of an appeal following discretionary review and thus a low expected return from discretionary review. If, however, the initial likelihood of success exceeds a threshold, which here turns out to be 23 percent, then discretionary review will be desirable. 18 For instance, suppose that the likelihood of reversal is 30 percent. This implies that the probability of bad news is 75 percent and the probability of good news is 25 percent. 19 Hence, the expected value of discretionary review is 25 percen t # $125,000, or $31,250, which exceeds its cost of $20,000, so discretionary review would be worthwhile. Direct appeal, however, would not be worthwhile, because 30 percen t # $250,000 p $75,000, whereas its cost is $100,000. Discretionary review may be desirable not only when the initial likelihood of success is not high enough to make direct appeal worthwhile, 17. This is not to say that the appeals court would announce to the world that it heard bad news or its assessment of the probability of a reversal. The court might merely announce its decision, or if it justifies its decision, it might well not make direct reference to the probability of success on full appeal. 18. This threshold is found by asking at what initial probability q of reversal does the expected value of discretionary review just equal its cost, $20,000? The expected value of reversal under discretionary review is in general (1 p)($125,000) p [(q.1)/.8]($125,000). Solving [(q.1)/.8]($125,000) p $20,000 yields q p From note 15, p p (.9 q)/.8, and here q is.3. Hence, p p.6/.8 p.75. Observe too that.75 #.1.25 #.9 p.3.

11 DESIGN OF THE APPEALS PROCESS / 73 as we just saw was true when the initial likelihood was 30 percent, but also when the initial likelihood is high enough to make direct appeal better than ending the case. Suppose, for instance, that the initial probability of success is 50 percent. Then direct appeal would be worthwhile bringing were it the only option, for it would yield a return of 50 percent # $250,000 p $125,000 at a cost of $100,000 and so involve a net benefit of $25,000. Discretionary review would be better than direct appeal, however. To see this, note that a 50 percent probability of success implies that the probabilities of bad news and of good news are each 50 percent. 20 Hence, the expected value of discretionary review is 50 percen t # $125,000 p $62,500, so its net value is $62,500 $20,000 p $42,500. Because the net value of discretionary review of $42,500 exceeds that of appeal, $25,000, discretionary review is superior. The underlying advantage of discretionary review over direct appeal is that under discretionary review, society avoids an expenditure of $100,000 on an appeal whenever bad news is heard. Direct appeal becomes superior to discretionary review if the initial prospect of success exceeds a second threshold, which in this example is 69 percent. 21 For example, if the initial probability of reversal is 80 percent, then appeal would yield a net benefit of 80 percent # $250,000 $100,000 p $100,000. Because an 80 percent probability of reversal implies that the likelihood of good news is 87.5 percent, 22 the net value of discretionary review is 87.5 percent # $125,000 $20,000 p $89,375, which is lower. The reason is that, because discretionary review is so likely to result in a decision to appeal, the expenditure of $20,000 on discretionary review is likely to be a waste. To summarize this example, if the initial probability of reversal is between 0 and 23 percent, it is best for the case to terminate; if the probability is between 23 and 69 percent, it is best for discretionary review to be employed; and if the probability exceeds 69 percent, it is best for a direct appeal to be made. This is portrayed in line c of Figure 2. Note that under a regime of appeals only, appeals are desirable to make only when their expected value exceeds their cost of $100,000. In other words, if p is the probability of reversal, appeals are desirable 20. From the formula p p (.9 q)/.8 and q p.5, I obtain p p.4/.8 p To determine the threshold, I want the probability q at which the value of appeal is just equal to the value of discretionary review. The value of appeal is $250,000q $100,000. The value of discretionary review is [(q.1)/.8]$125,000 $20,000. Setting these expressions equal to each other and solving for q, I obtain percent. 22. From p p (.9 q)/.8 and q p.8, I obtain p p.1/.8 p.125.

12 74 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 Figure 2. Optimal behavior under different appeals regimes if and only if p # $250,000 exceeds $100,000, which is to say, when p exceeds 40 percent. This is shown in line b of Figure 2. There are then two differences in outcome from the socially best situation, which are displayed in line c of Figure 2. First, cases in which the chances of reversal are between 23 and 40 percent are not appealed, whereas it would have been desirable to hear these cases in discretionary review and then some of them would have gone on to be appealed because they would have been discovered to be likely to be meritorious. Thus, one loss from not having discretionary review available is that cases that should have been heard in discretionary review will be terminated. The measure of this loss is the expected value of discretionary review. For instance, if the chance of reversal is 30 percent, the expected value of discretionary review is calculated to be $31,250 $20,000 p $11,250, so this amount is lost when discretionary review is unavailable. Second, cases in which the chances of reversal are between 40 and 69 percent are appealed, whereas it would have been better to have them heard in a discretionary review proceeding. The social loss from not having discretionary review for such cases is that, on hearing bad news, cases cannot be dropped and the cost of a full appeal cannot be saved. For instance, I showed that if discretionary review is employed when the prospect of success is 50 percent, the net value of discretionary review is $42,500, whereas if appeal is made, its net value is $25,000; hence, there is a loss of $17,500 from having to use appeal as a result of forgoing the savings from avoiding the expense of an appeal when the news from discretionary review is bad. Now consider the difference in outcomes between the optimal regime

13 DESIGN OF THE APPEALS PROCESS / 75 and a regime of discretionary review only. Here, as is displayed in line a of Figure 2, the problem is that for cases for which the initial chance of success exceeds 69 percent, there will be discretionary review, whereas in the optimal system there would be direct appeal. For example, when the chance of success is 80 percent, I observed that under discretionary review the net value is $89,375, whereas it is $100,000 under appeal, so appeal is better by $10,675. The reason for the advantage of appeal, recall, is that there is a high probability that discretionary review will constitute a sterile effort because it is likely to result in a decision to proceed to appeal The Appeals Process Given Parties Self-Interested Incentives I have discussed in the preceding section the socially best design of the appeals system, assuming that the choices of appellants and of the appeals courts about whether to take a case on appeal are socially desirable. But the motivations of litigants and of appeals courts may not be aligned with society s. Let me now discuss these issues Appellants Incentives. One factor that is relevant to appellants incentives is that they do not bear the full social cost of adjudication they bear their own costs but not the expenses of opposing appellees or of the appeals courts. 23 That an appellant does not bear the full social cost of an appeal implies that there will be a socially excessive incentive to bring an appeal, other things being equal. In my example, suppose that the cost of an appeal to the appellant is $40,000, that the cost to the appellee is $30,000, and that the cost to the court is $30,000, so that the full social costs are $100,000 (as I had assumed was the total). Then the appellant would find bringing an appeal worthwhile whenever the probability of reversal exceeds 16 percent, as 16 percen t # $250,000 p $40,000, whereas it is socially desirable to bring an appeal only when the probability exceeds 40 percent, as 40 percen t # $250,000 p $100,000. That an appellant does not bear the full social cost of discretionary review has a somewhat complicated effect on the appellant s incentives to choose discretionary review. Suppose first that, in the absence of discretionary review, the appellant would not bring an appeal (in other words, that the appellant s initial probability of reversal is less than Except to the extent that they might have to pay a fee for making an appeal, a factor that I will for the present assume is absent. On such fees, which tend to be nominal, see Section 4.2.

14 76 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 percent). Then there would tend to be a socially excessive incentive to choose discretionary review. This is so not only because the appellant s cost of discretionary review is less than the social cost but also because the appellant s value of discretionary review may be socially excessive. 24 However, suppose next that, in the absence of discretionary review, the appellant would bring an appeal. Then it is not clear whether discretionary review would be chosen too often. The reason is that the value to the appellant of discretionary review over appeal is less than society s value, for the value resides in the appellant s savings from avoiding an appeal that is unlikely to succeed, and these savings are less than the social savings (just because the appellant s cost of an appeal is less than the social costs). A second factor that can cause the appellant s incentives to differ from society s concerns the value of a reversal. An appellant might place a lower value on a reversal than society because a reversal would clarify the law, set a new precedent, or induce trial court judges to improve their decision making and thus benefit future actors but ordinarily not the appellant. Or an appellant might attach a greater value to a reversal than society, for instance, when a reversal would yield the appellant significant damages but would not be much noticed by other parties and would exert only a negligible effect on their future behavior. That an appellant s evaluation of a reversal may diverge from society s has clear implications for the incentive to bring an appeal. To the degree that an appellant s value of a reversal is less than society s, the appellant would have an inadequate incentive to bring an appeal therefore counteracting the excessive incentive due to the disparity between private and social costs. Conversely, to the extent that an appellant s value of a reversal exceeds society s, the appellant would have an excessive incentive to bring an appeal thus exacerbating the excessive incentive to bring appeals due to the difference between private and social costs. The influence of a divergence between the appellant s value of a reversal and society s on the incentive to choose discretionary review depends on whether, if discretionary review is not chosen, appeal would be chosen. Suppose that, in the absence of discretionary review, there 24. The reason that the private value of discretionary review may be socially excessive is that its value (when a direct appeal would not be brought) inheres in obtaining good news and deciding to go ahead to appeal. When the appellant goes ahead to appeal, he may derive a socially excessive benefit because his cost of appeal is less than the social cost.

15 DESIGN OF THE APPEALS PROCESS / 77 would not be an appeal. Then if the appellant s value of a reversal is less than society s, so too would tend to be the value of discretionary review (and conversely if the appellant s value of a reversal exceeds the social value). Suppose, however, that in the absence of discretionary review, there would be an appeal. Then if the appellant s value of a reversal is less than the social value, the value of discretionary review might exceed the social value Appeals Courts Incentives. If the appeals court engages in discretionary review, it ought to proceed to an appeal if and only if the expected benefit from doing so exceeds the social cost of an appeal. In our example, this means that an appeal ought to be undertaken when there is good news, for the expected benefit would then be 90 percent # 250,000 p $225,000, exceeding its social cost of $100,000, but not when there is bad news, for then the expected benefit would only be 10 percen t # $250,000 p $25,000. However, the appeals court s incentives to take a case after discretionary review may deviate from what is socially best. If, for example, the appeals court puts too much weight on its own time and resources, it might turn down too many appeals. And if its valuation of reversals differs from society s, this also would lead to distorted decisions Social Policy in Light of Incentive Problems Now that I have discussed the differences between the socially ideal behavior of the parties and their actual behavior given their own incentives, two questions naturally arise. First, does it remain socially advantageous for appellants to be able to choose between discretionary review and direct appeal? Second, is there some way of attenuating the incentive problems? I address these questions in turn The Optimal Appeals Regime Given the Presence of Incentive Problems. The presence of incentive problems could alter the conclusion that it is desirable for appellants to be able to choose between discretionary review and appeal. 26 But the circumstances under which that would be so are somewhat special. Their nature can be understood from 25. The logic is that the value of discretionary review over appeal resides in the net savings obtained when appeal is not pursued. This net savings is the cost of appeal minus the expected value of reversal. Because the appellant s expected value of reversal is lower than society s, the appellant s net savings might be greater than society s. 26. In the Appendix, I show that it is possible that a regime of appeals only might be best and also that a regime of discretionary review only might be best.

16 78 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY 2010 a consideration of why a regime under which just one avenue of appeal is available just direct appeal or just discretionary review might be superior to a regime of choice. Consider first the regime under which direct appeal alone is available. Let us ask how it could be that this regime would be superior to the regime in which discretionary review is also available. In the joint regime, there would be two differences in behavior: some appellants would choose discretionary review instead of direct appeal, and some appellants would choose discretionary review instead of doing nothing. One or both of these two differences in outcome would have to be socially undesirable for the regime of appeals only to be best. What would make a switch from direct appeal to discretionary review socially undesirable, even though the appellant prefers the latter? One possible reason is that the private-cost bias, that appellants only bear a part of the social cost of adjudication, would be more pronounced with regard to discretionary review and so would lead to switching from appeal to discretionary review, even though that is socially disadvantageous. This outcome, however, seems unlikely. On one hand, I see no basis for believing that the difference between the appellant s cost and the social cost would be larger for discretionary review than for full appeal; to the contrary, I suspect the opposite would usually be true because full appeal is a more serious process and involves a greater commitment of resources by the appellee and the appeals court. On the other hand, even if it were true that the private-cost bias is such that some changes to discretionary review would be socially unwanted, it seems probable that most changes to discretionary review would be socially good, as they would save the costs of full appeal. A second possible reason that a switch from direct appeal to discretionary review would be socially undesirable is that discretionary review might result in systematic, socially undesirable denial of appeals. For this to be true, however, appellants would have to choose discretionary review, despite the presumed tendency of appeals courts not to take cases for appeal. That seems improbable. Let us now turn to the question, what would make a switch from doing nothing to engaging in discretionary appeal socially undesirable? It would have to be that discretionary appeal is socially undesirable, even though it is chosen by appellants. This possibility does not seem implausible; it could arise either from the private-cost bias, making discretionary review and appeal less expensive to appellants than it is socially, or from appellants valuing reversal more highly than society does.

17 DESIGN OF THE APPEALS PROCESS / 79 In sum, it is an empirical question whether, and the extent to which, the two effects of allowing appellants to choose discretionary review in addition to appeal that they might switch from appeal to discretionary review and that they might choose discretionary review rather than doing nothing are socially undesirable. But reflection on the circumstances that would have to hold for these changes to be undesirable leads me to believe that they would often be desirable and that, especially, switches from appeal to discretionary review are likely to be socially desirable. Overall, then, I suggest that the benchmark for thinking about adding the option of discretionary review to the right of appeal is that this policy would be socially desirable. Next let us consider a regime in which discretionary review alone is available and ask how it could be that this regime would be superior to the joint regime in which appeal is also available. In the joint regime, there would again be two differences in behavior: some appellants would choose appeal instead of discretionary review, and some would choose appeal instead of doing nothing. One or both of these two differences in outcome would have to be socially undesirable for the regime of discretionary review alone to be best. Let us proceed analogously to how we did before and inquire why each of these differences might be socially undesirable. Under what conditions would a switch from discretionary review to appeal be socially undesirable? One circumstance is that the private-cost bias is more significant with regard to appeal and makes appeal relatively more attractive to appellants than is socially best. A second circumstance is that appellants place a greater value on reversal than is socially best, so they want appeal more often than appeals courts would grant it. These two circumstances would also explain why a switch by appellants from doing nothing to full appeal would be socially undesirable. Neither of these circumstances seems unlikely. Hence, I can more readily imagine that incentive problems would lead to the conclusion that a regime of discretionary review alone is best than the conclusion that a regime of appeal alone is best. In any event, my conclusion is this. There are a variety of distortions that make behavior different from the socially optimal and that can cause a regime in which there is a single appeals procedure to be superior to the joint regime in which both discretionary review and appeal are available. But the point of departure for evaluation of regimes should be that a joint regime is best, especially in comparison with a regime of direct appeals only.

18 80 / THE JOURNAL OF LEGAL STUDIES / VOLUME 39 (1) / JANUARY Attenuation of Incentive Problems. Last, let me consider the issue of how in theory to improve the incentives of parties. Use of corrective policies would not only make the behavior of parties socially better, it would also make it more likely that it would be best to employ the regime in which there is a choice between discretionary review and appeal. The problem that the cost of appeal, or of discretionary review, is too low could be corrected by requiring appellants to pay a fee for each equal to the sum of the appellee s costs and the court s costs. To correct the problem caused by differences between the private and the social values of reversal, rewards or sanctions based on the occurrence of reversals could be employed. In particular, if the private value of a reversal is less than the social value, the appellant could be given a reward equal to the difference (for example, if the private value of a reversal is $100,000 and the social value is $150,000, the appellant could be given a $50,000 reward for a reversal), and if the private value of a reversal exceeds the social value, the appellant could be required to pay a tax equal to the difference if a reversal occurred. In this way, the private and social values of a reversal would be brought into alignment. Analogous corrective policies could in principle be employed with respect to the appeals courts themselves if their incentives were distorted. Having said what policies could improve the behavior of appellants and, possibly, appeals courts, one must note that the policies may be difficult to implement. In order to employ the policies to improve appellant behavior, the state would have to possess information about legal and judicial costs as well as information about differences between private and social values of reversal. The latter information might be especially difficult to obtain. With regard to appeals courts, the informational difficulties would be similar. In addition to these problems of implementation are difficulties going outside the considerations of an economic model. Notably, the view that individuals should as a matter of fairness have access to the appeals process conflicts with the imposition of significant fees for its use, and the view that the judiciary is objective conflicts with the use of policies that would be seen as designed to alter otherwise imperfect motivations of appeals courts Modifications of the Model The Possibility That Expenditures on Discretionary Review Reduce the Cost of a Subsequent Appeal. I assumed for simplicity in the model that the cost of an appeal does not depend on whether a discretionary review

19 DESIGN OF THE APPEALS PROCESS / 81 occurred. The occurrence of a discretionary review, however, should usually lower the cost of an appeal, for many of the tasks that an appeals court performs in a discretionary review it would otherwise have to undertake in an appeal. This factor should raise the social value of discretionary review relative to appeal. The Possibility That Expenditures on Appeal May Be Guided by What Is Learned from Discretionary Review. Another consideration omitted from the model is that a discretionary review may reveal to the litigants which issues will be important in an appeal. Hence, greater expenditures can be directed toward these issues and less toward others. Such socially beneficial modifications in expenditures cannot be made in the absence of discretionary review. The Possibility That a Request for Discretionary Review Would Signal to the Court That the Appellant Is Uncertain about Success. Account was not taken in the model of the rational inference of appeals courts that appellants who elect discretionary review believe their cases to be less likely to succeed than those who request appeal. It is possible, however, that such a negative inference would have no influence on the analysis. Suppose that the information (say, about a mistaken interpretation of a precedent by the trial court) on which the appellant based his or her estimate of success is communicated to the appeals court in its discretionary review. Then the appeals court s negative inference from the fact that discretionary review was elected would be rendered moot. Its initial inference would merely be validated by what it would learn in its discretionary review (it would learn that the appellant s argument that the trial court erred in its interpretation of a precedent was weak). Suppose, on the other hand, that some of the information on which the appellant based his or her estimate of reversal would not be presented to the appeals court in its discretionary review (owing to constraints such as on the length of briefs). Then the inference from the fact that the appellant chose discretionary review would be relevant, for it would not be merely validated by the discretionary review. If the negative signaling effect of having brought discretionary review would undesirably discourage the use of discretionary review, that could be countered by lowering the fee for discretionary review or by allowing greater presentation of evidence in the discretionary review. The Mitigation of Excessive Appeal Due to Attorney Self-Interest under Ddiscretionary Review. Attorneys have a personal interest in making appeals, as that means more work for them, which suggests that to some degree attorneys will give unduly optimistic advice to clients and promote